Highwoods Properties, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Highwoods is an office REIT operating primarily in Atlanta, Charlotte, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa. At quarter-end, it owned or had an interest in 28.1 million rentable square feet of in-service properties, 1.2 million square feet under development and approximately 225 acres of development land. Unless noted, financial amounts below are in millions.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Rental and other revenue | $183.2 | $184.1 | $376.0 | $356.4 |
| Net income | $39.0 | $41.4 | $230.3 | $49.8 |
| Net income available to common stockholders | $37.0 | $39.4 | $222.5 | $46.7 |
| Diluted earnings per common share | $0.36 | $0.38 | $2.14 | $0.45 |
| Net operating income (NOI) | $128.0 | $123.5 | $258.6 | $235.3 |
| Funds from operations (FFO) per diluted share | $0.93 | $0.87 | $1.86 | $1.59 |
- Q2 revenue declined 0.5%; NOI increased 3.7%. Same-property NOI rose 3.1%, to $114.2 million, while same-property cash NOI fell to $102.1 million from $104.1 million, reflecting rent deferrals and other non-cash adjustments.
- First-half net income and EPS rose sharply, primarily because gains on property dispositions were $153.4 million, versus $6.7 million in the prior-year period. Excluding those gains, the headline year-over-year increase is not indicative of recurring operating growth.
- Six-month operating cash flow was $180.2 million, compared with $173.3 million. Investing activities provided $129.7 million, largely due to property-sale proceeds; financing activities used $311.0 million.
- At June 30, total assets were $5.06 billion and net mortgages and notes payable were $2.34 billion, down from $2.54 billion at year-end 2019. Cash and cash equivalents were $4.8 million, with a further $9.0 million restricted. The company reported a 36.8% leverage ratio, defined as debt and preferred stock relative to undepreciated asset book value.
Material changes and notable items
- In Q1, the company sold 41 buildings and land in Greensboro and Memphis for $338.4 million before buyer credits, recording $153.1 million of gains. This completed the first phase of its plan to exit those markets. It sold two additional Memphis buildings on July 1 for $23.3 million and expected a $9.3 million gain.
- Occupancy in the office portfolio declined from 92.0% at December 31, 2019 to 91.1% at June 30, 2020. Second-quarter leases covered 821,257 square feet; combined GAAP rents were 13.6% above rents on the prior leases for those spaces.
- Q2 diluted EPS fell to $0.36 from $0.38 as net income declined. First-half interest expense increased to $41.1 million from $39.1 million, despite lower average rates, due mainly to higher average debt balances.
- The company recorded a $1.8 million real estate impairment in Q2, based on changed market inputs and assumptions about asset use. It reported $2.3 million of credit losses on operating lease receivables for the first half.
Liquidity, outlook and risks
- The $600 million unsecured revolving credit facility had $14 million drawn at June 30 and none drawn at July 21; available capacity at July 21 was $599.9 million. The facility matures in January 2022, with two optional six-month extensions. The company reported compliance with debt covenants.
- The principal scheduled debt maturity through 2021 is $300 million of notes due June 15, 2021. Management said it expects to meet near-term liquidity needs through operating cash flow, cash, debt and equity financing, the revolver and asset dispositions.
- Management said COVID-19 had not meaningfully affected Q2 financial results but expected adverse effects in the remainder of 2020. Lower office usage reduced parking revenue and variable expenses; slower speculative leasing, tenant financial distress, potential defaults and future office-space demand were identified as uncertainties. Management could not estimate the extent of potential customer losses or predict second-half NOI and operating cash flow relative to 2019.
- Through July 21, the company had collected 99% of contractually required July rent. Temporary rent deferrals represented 1.2% of annualized rental revenue; most represented about two months’ rent and were expected to be repaid by the end of 2021. The filing also reports $5.0 million of deferred rent in receivables at June 30.
- Management expected approximately $201 million of remaining investment for started or committed development projects, and forecast funding about $89 million of its pipeline during the remainder of 2020. It expected $72 million to $127 million of non-core property sales during the rest of 2020, without assurance of timing or completion. Existing-portfolio capital expenditures were expected to be $15 million to $25 million below 2019 levels.
- The company maintained its quarterly common dividend at $0.48 per share; a dividend payable September 9, 2020 was declared after quarter-end. No formal full-year earnings or FFO guidance is stated in the supplied filing text.
- Additional risks include possible future impairments, tighter capital access, higher refinancing costs, covenant non-compliance, development or leasing delays, and lasting changes in demand due to work-from-home practices. Management noted COVID-19’s duration and economic effects were difficult to predict.
Important facts for investors to verify
- How recurring operating performance compares with reported first-half results after separating the $153.4 million of disposition gains.
- Subsequent rent collections, tenant credit losses, deferred-rent repayments and occupancy or leasing trends.
- Progress on the $300 million June 2021 maturity, refinancing plans and continued covenant compliance.
- Whether planned development funding and non-core asset sales proceed on schedule and within expected costs and proceeds.
- Whether COVID-19-related office usage changes, leasing demand and potential impairments materially affect future cash flow, NOI or dividends.